Survey Says, Sentiment is…Mixed

A wave of sentiment surveys hit, as usual, at the close of the second quarter. While money managers are becoming more bullish on high-yield investments, consumers seem to have mixed feelings about the economy and the market. Of course, sentiment surveys of money managers and consumers have existed for many decades, and as long as they’ve been around their usefulness has been debated. Some say they can tell us where investors are inclined to put their money; others say they're great contrarian indicators; still others say that over the long-term they're moot.

Out on June 24, the Russell Investments’ Investment Manager Outlook (IMO), its quarterly survey of 300 professional money managers, suggests that the men and women managing portfolios have increased their appetite for risk since the market hit March lows. Six of 13 asset classes and eight of 12 sectors reached either a new high in manager bullishness for the IMO survey or the second highest-ever result.

Seventy-four percent of managers were bullish on emerging markets (more than double the March IMO figures) and 66 percent were bullish on high-yield bonds, an increase of 5 percent since March. And they continue to avoid traditional defensive plays—bullishness for cash and Treasuries fell to 10 and 9 percent. And while most managers believe a credit market recovery is up to 12 months away they are already positioning for an economic recovery: bullishness for the materials and processing sector doubled, rising to 60 percent from 33 percent in March; energy also leapt higher.

“Managers are indicating a much higher level of comfort with risk and appear to be making a rotation from defense to offense…’anything but cash and Treasuries appears to be the rule for managers right now,” said Mark Eibel, director of client investment strategies at Russell. But Russell has never tracked the predictive power of its sentiment survey and could not say whether it has offered some clues to actual market direction in the past.

Some consumers seem to agree with Russell’s money managers about the market, at least according to one prominent consumer sentiment measurement. The University of Michigan Consumer Sentiment Index, a telephone survey of 500 Americans that measures their perceptions of current and expected economic conditions as well as near and long-term inflation risk, reached 70.8 in June, its highest point since February 2008 and the index’s fifth straight monthly increase since February 2009.

But other consumer sentiment readings paint a very different picture, as Gluskin Sheff chief economist and market strategist David Rosenberg said in a research note on Monday. The Rasmussen index, a daily measurement of consumer confidence in the economy, actually dipped in June—to an average of 73.1, down from 74.1 in May. Meanwhile, the ABC News/Washington Post consumer comfort poll hit -53 in June, a decline from -49 in May and two points shy of hitting an all-time low. The same poll’s “personal finances” subindex hit -22 in June, a new low, which is worse now that it was back in mid-March (-4) when the equity market had been crushed.

And on Tuesday, the New York-based Conference Board released its Consumer Confidence Index. After rising for several months in lock step with the stock market rally, it fell to 49.3 for June from 54.8 in May. The news coincided with a drop in the major US equity indices. The index measures two components—how consumers feel about the economy now and their expectations for the next six months.

According to David Rosenberg, currently the chief economist and strategies at Gluskin Sheff and formerly a North American economist for Merrill Lynch, who correctly called the housing and credit collapse, the decline in this index was spread between both 'expectations,' which does a decent job predicting near-term trends in consumer spending, and 'present situation.' "Confidence is still well above the historic 25.3 low posted in February but is still very much consistent with an economy knee-deep in recession," he wrote in a Jun 30 report.

Of course, some market watchers complain that consumer and manager sentiment readings only offer short-term readings of the market. A Random Walk Down Wall Street author and Princeton economist Burton Malkiel told Registered Rep. they are nothing more than market-timing tools—a pursuit he calls futile over long periods of time.

Others, like Jeff Saut, chief investment strategist for Raymond James & Associates, said “directionality is more important than the numbers.” To better gauge the market, says Saut, a superior indicator is the put/call ratio of the Chicago Board Options Exchange (CBOE). A high volume of puts compared to calls indicates a bearish sentiment in the market and vice versa. As of yesterday, the ISE/CBOE 10-day put/call ratio was 1.35, indicating that more puts have been purchased than calls during the prior two weeks on these exchanges—a bearish indicator. This ratio ranks above 68 percent of those taken in the prior 12 months.

Mark Hulbert, editor "The Hulbert Financial Digest," a ranking of investment newsletters, says some sentiment readings are worthy of a look but usually serve as contrarian indicators. That includes his own, the Hulbert Stock Newsletter Sentiment Index, he says. “I think in general, people tend to overreact,” says Hulbert.

LPL Financial’s chief market strategist, Jeffrey Kleintop, agrees and has put together a table to illustrate his point. “When the sentiment number from the University of Michigan has been very high—greater than 110—returns were negative over the next 12 months,” he says. “If it’s below 60 as it was recently, the S&P 500 is up 23 percent on average over the next 12 months,” says Kleintop. “The more pessimistic consumer the better the gains are likely over the year ahead, and vice versa.”